Clergy Tax Classifications and Church Withholdings.

Clergy tax also known as minister tax raises some interesting questions for the church...

Is the church required to hold out federal and state income tax from a minister's paycheck?

How about Social Security and Medicare taxes? Is the church required to match the FICA tax?

A clergy's tax situation is unique and as church administrators residing in the United States, it is imperative that we know the IRS's tax laws regarding minister or clergy's tax before we write that first paycheck.

But first and foremost.....

Who is considered a clergy or minister for tax purposes?

• Be licensed or ordained
• Administer the sacraments of the church (weddings, funerals, baptisms, and communion, etc...)
• Be considered a religious leader by the church
• Conduct religious worship
• Have management responsibilities in the church

The Pastor is almost always considered a clergy for tax purposes.

Do clergy receive special tax treatments?

Yes and No. Clergy receive special tax treatment for the following three topics:

• Ministers pay their own self-employment tax.(Even though ministers are considered church employees, they are treated as self-employed for Social Security and Medicare tax purposes.
• Ministers can receive a Housing Allowance and/or live in a church provided parsonage. (The value of both of these are excluded from a minister's calculation of income tax...but still subject to self-employment tax)
• Churches cannot withhold Social Security and Medicare tax from a minister's paycheck.

What is self-employment tax?

Unlike non-minister employees, the church cannot withhold ½ of the Social Security and Medicare tax from a minister employee’s paycheck and does not have to match any FICA tax as none is held out.

Instead, a minister employee is responsible for paying his own self-employment tax. As a result, the minister employee actually pays twice as much Social Security and Medicare as a non-minister employee.

In most circumstances the amount of the minister’s income that is subject to the self-employment tax includes the base salary, the housing allowance, and the fair rental value of church provided housing, if any.

An example of what a minister could expect to pay in self-employment tax :

Can a clergy opt out of social security?

Yes. But he must do it by the second year in which he earned more than $400 of ministerial income. IRS Form 4361 must be used and it must be filed on the correct basis of religious belief. If approved by the IRS, only earnings from ministerial services are exempt from self-employment tax. Form 4361 indicates that once the exemption is approved, you cannot revoke it.

Can a church withhold tax for the clergy?

Yes. The church can withhold income tax, but not Social Security and Medicare tax.

A minister is responsible for paying the Social Security and Medicare tax himself. He can pay this tax by making quarterly estimated tax payment, or by requesting the church to hold out extra income tax.

The minister must complete a form W-4 and request that a specific amount be withheld from each paycheck.

For example, if a minister estimates that his combined income and self-employment tax for the year will be $9600. He can request that the church withhold $800 of income tax from each month's paycheck.

Even though the minister can only elect withholding of income taxes, he can use these tax payments against both income and self-employment tax since they are added together on his personal income tax return (Form 1040).

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Additional Resources

Clergy Tax: For 2008 Returns By J. David Epstein / Gospel Light IRS regulations are ever changing, and to avoid costly mistakes you must stay current. Written by an attorney specializing in church tax law, this user-friendly step-by-step manual will assist you in accurately preparing your return and avoiding troublesome audits. Get up-to-date answers to your specific questions about housing allowances, medical reimbursements, social security, and more. 64 pages, softcover from Regal.

Zondervan 2009 Minister's Tax & Financial Guide: For 2008 Returns By Dan Busby, CPA / Zondervan If you find April 15th taxing in more ways than one, let Busby's easy-to-follow manual come to the rescue! The 2009 edition features a line-by-line explanation of the 1040 Form and recent changes in the tax code---with valuable hints about how to reduce next year's bill. Also includes guidance on compensation, retirement planning, and medical expenses. 192 pages, softcover.

The Church Treasurer's Manual: A Practical Guide for Managing Church Finances - Book & CD-ROM By Bruce Nuffer / lifestream Have you been appointed church treasurer? This handy manual will help you do your job efficiently and effectively! Packed with time-saving tips and practical suggestions, it offers an easy-to-understand overview of basic accounting principles; explanation of tax regulations; record keeping forms for taxes, individual contributions, and weekly offerings; advice for handling payroll and other compensations; and more. 160 pages, softcover from Beacon Hill.

Pastor Mug By Kemp (kapan-kent Co) Deep blue mug with white interior, professional in style and design with Pastor inscription and simple cross motif. Quotation from Roy Lessin on the reverse A pastor is obedient to God's calling, responsive to His grace, faithful to His service, committed to His people and a representative of His love. 4.5" tall.

(Additional sizes available by clicking on product link then clicking on link under "CBD Stock Number")

Rock of Ages, Hooded Sweatshirt, Medium (38-40) By Red Letter 9 Inc Chocolate brown, adult long sleeve, drawstring hooded sweatshirt with front kangaroo pocket. Features large guitar pick graphic with Rock of Ages - Psalms 95:1 in old English lettering. Machine washable 50% cotton, 50% polyester.

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